Why understanding financial behavior is critical to achieving long-term financial wellness

Achieving financial wellness takes more than knowledge.

Understanding financial behavior is proven to help people change those negative behaviors that may be derailing financial stability and security.

While improving financial literacy is an essential first step to financial wellness, gaining a clearer understanding of financial behavior can be crucial to changing negative patterns and reinforcing positive ones.

Knowledge isn’t enough.

Financial literacy is a measure of the degree to which one understands key financial concepts and possesses the ability and confidence to manage personal finances through appropriate short-term decision making and sound, long-range financial planning, while mindful of life events and changing economic conditions.

Financial wellness is having the knowledge, ability, and desire to make intelligent financial decisions and having the capacity to live a happy life within one’s means.

Our emotions often are closely connected to how we manage money. This becomes more evident during times of crisis, whether it’s a personal setback or a global pandemic.

Someone who is highly impulsive and lacking in self-control may have trouble saving for the future no matter their level of financial literacy.

Someone who is overconfident in their retirement preparation may think it will somehow all work out even though they aren’t taking the necessary steps–and may even be making risky decisions.

Employer financial wellness programs that incorporate the psychology of money will be more effective in helping employees learn the “why” behind financial decision-making and make personality-based positive changes.

Working within natural tendencies and traits will lead to more success when trying to change habits and behavior.

The psychology of money

Many financial wellness programs use an approach that is entirely fact-focused and based on unbiased, rational thought.

But for most everyone, financial behavior is unconsciously driven by emotions. We each have a complex relationship with money, one that can be fraught with guilt, shame, fear and envy.

Financial psychologists Bradley Klontz and Ted Klontz coined the term “money script” to describe our core beliefs about money. Money scripts “are typically unconscious, developed in childhood, passed down from generation to generation within families and cultures, contextually bound, and often only partial truths.”

Helping employees understand what they should be doing financially based on age and life stage is essential, of course. But also helping them understand the strengths and weaknesses of their financial behavior based on personality type can be what engages them in long-term changes.

Behavioral finance exercises can help people understand how their emotions and behaviors influence their financial decisions—an understanding that is essential to making long-term changes, including:

• Reducing unnecessary spending
• Increasing savings
• Reducing debt
• Establishing or increasing retirement savings

Research shows that the need for financial wellness education is vast among all income levels. Employer financial wellness programs that include recommendations based on financial personality will benefit an entire workforce and lead to higher levels of financial wellness, which can, among other things, improve productivity and lower healthcare costs.

Kris Alban is executive vice president at Enrich Financial Wellness.